Archive - Jun 2011 - Story

It is rare to find a market where the technical evidence is so compelling for a strong rally yet the fundamental basis for such a rally so lacking. Exactly where do Bulls think the growth and rising profits are going to come from? The answer for the past few years has been massive Federal Reserve/Federal intervention and stimulus, and a weakening U.S. dollar that boosted overseas profits via the legerdemaine of currency devaluation. But three years of these policies have accomplished nothing but load the taxpayer with staggering amounts of debt: none of the causes of the 2008 implosion have been fixed or even addressed. As Armstrong notes, the massive interventions did not shorten the crisis, they have prolonged it. This reality has filtered down to the political swamp, and now the politicos are hesitant to bet their own futures on additional trillions in stimulus and quantitative easing. For the first time in memory, the Federal Reserve is on the defensive. Simply put, its policies have failed to accomplish anything except prop up a rotten, insolvent banking sector that needs to be declared bankrupt and swept into the dustbin of history.

• And the truth keeps coming out: Evacuation urged for radioactive hot spots in Japan beyond 20km zone (Japan Times)
• Germany's Merkel: Europe and Euro Tightly Bound Together (WSJ)
• Hardline IMF forced Germany to guarantee Greek bailout (Guardian)
• Hunt for ‘Holy Grail’ Hunt Pits ECB Against Naked Banks (Bloomberg)
• Default by Greece ‘Almost Certain’: Greenspan (Bloomberg)
• SEC could file Civil Fraud charges against some Raters (Reuters)
• Merkel’s Greek Bondholder Gambit Tested as Sarkozy Visits Berlin (Bloomberg)
• Biggest banks face capital clampdown (FT)
• Too Big to Fail Ends With Wave of a Magic Wand (Bloomberg)
• Biden Talks Aimed at $4 Trillion in Cuts Over 10 Years (WSJ)
• California's Brown vetoes fellow Democrats' budget (Reuters)
• U.S. Confidence Out of Sync With Stock Gains (Bloomberg)

• Market talk that a new Greek aid package could be worth as much as EUR 150bln against a previous estimate of EUR 120bln
• German Chancellor Merkel and French President Sarkozy demonstrated a united front in their approach to tackle the Greek problem
• German chancellor Merkel said she wants involvement of private creditors on a voluntary basis, and wants to work with the ECB on investors’ role in Greece
• French President Sarkozy said that we have found an agreement on the private sector involvement on Greece, in line with the Vienna initiative

Congressman Ron Paul, the Republican presidential candidate who is chairman of the U.S. House Financial Services subcommittee and chairs the House's Subcommittee on Domestic Monetary Policy plans to question U.S. Treasury officials next Thursday (June 23) about the U.S. gold reserves and get them to testify regarding the authenticity of the nation’s gold reserves. This is an important question given the increasingly precarious state of the U.S.’ finances and is important to the gold market as the unaudited U.S. gold reserves are the largest holdings of gold bullion in the world. Paul has introduced legislation that would require an independent audit of the 5,000 plus tons of gold bullion that is believed to stored in the Fort Knox, Kentucky vault. The audit would include other U.S. gold reserves held in government facilities in Denver, West Point and the New York Federal Reserve Bank in lower Manhattan. Paul is also calling for some of the bars to be assayed and tested by a laboratory in order to prove that it is investment grade gold bullion as the U.S. Treasury Department says. There have been unconfirmed reports that the Chinese received a shipment of large gold bullion bars from the U.S. that contained tungsten. Last August Paul said that "if there was no question about the gold being there, you think they would be anxious to prove gold is there." He has been pressing the point since the early 1980s, when he was a member of the U.S. Gold Commission.

Today we get two very circular resonance amplifiers in the form of Consumer Sentiment and the Index of Leading Indicators. When markets go up, these go up, pushing the market higher. When the market goes down, these go down, and push the market lower. In other words, the only relevant thing, correlating at 1.000 and leading the market, will once again be the EURUSD which is the only chart one needs these days, while one can trace the critical fate of Greek bank deposits by looking at the EURCHF.

Previously we disclosed that FRA-OIS spreads in both the US and Europe have been on a tear as a result of ongoing concerns that European liquidity may be frozen. Then following the previous post we decided to check in on Chinese liquidity. To our lack of surprise we find Chinese availability of unsecured interbank lending has quietly dropped to the second worst of 2011, now that the rate on 7 Day SHIBOR has hit 7.4%, the highest since the spike in early January, and a range that goes back all the way to the August 2007 quant market crash. Keep a close eye on this should Chinese vital interests become impaired and China is forced to dump trillions of money formerly reserved for US Treasurys (and currently held in US-denominated reserves, thus forcing a selling of USD and buying of EUR), to buy European debt, once the next two dominoes, Italy and Spain, fall.

The country which has so far been doubling down on its losses in European bond exposure, much to the amusement of cynical onlookers, has finally disclosed that Europe is the locus of Chinese vital self interests, and that should Europe go down, one very major domino would be the implosion of China itself. Per Reuters: "China's "vital" interests are at stake if Europe cannot resolve its debt crisis, the Chinese Foreign Ministry said on Friday as it voiced concern about the economic problems of its biggest trading partner. At a media briefing ahead of Chinese Premier Wen Jiabao's visit to Europe next week, Vice Foreign Minister Fu Ying made plain that China had tried to help Europe overcome its troubles by buying more European debt and encouraging bilateral trade..."Whether the European economy can recover and whether some European economies can overcome their hardships and escape crisis, is vitally important for us," Fu said. "China has consistently been quite concerned with the state of the European economy," she said." And just like every time before when China has tripled and quadrupled, and now quintupled, on Greek, Portuguese and other debt, so this time will be no different as merely loading up an insolvent entity with even more leverage does nothing but shorten the half life of each additional "bailout." When Greece blows up, forget the other European countries: keep a close eye on China.

In a completely irrelevant move, which will do nothing to help the government pass the much hated mid-term fiscal plan, or diffuse the social anger, this morning as expected George Papandreou picked outgoing Defence Minister Evangelos Venizelos as new finance minister, jettisoning George Papaconstantinou, architect of a belt-tightening programme that has stoked violent unrest and a revolt in his Socialist Party. Reuters correctly observes that the move seemed likely to buy time for the embattled prime minister but did little to dilute scepticism that Greece would be able to implement a new round of deeply painful reforms... Papaconstantinou becomes environment minister in
the reshuffle.The new cabinet is expected to be sworn in later on Friday
and a confidence vote is due by Tuesday night. Rather than giving new
impetus to the reforms, analysts said, the reshuffle was aimed primarily
at quelling dissent in the Socialist Party by moving the unpopular
Papaconstantinou and appointing the prime minister's main party rival
Venizelos." All this means is that instead of Sunday being the critical decision day when the vote of no confidence will be held, it will now be Tuesday, as Europe is now struggling to exist day to day, and push back the inevitable by 24 hours one day at a time. "The move failed to impress markets and the cost of
insuring Greek debt against default hit a fresh record above 2,000
basis points on Friday."

A snapshot of the European Morning Briefing covering Stocks, Bonds, FX, etc.
Market Recaps to help improve your Trading and Global knowledge

About a month ago we reported on an inquiry launched into JPM's "anti-competitive" and "monopolistic" practices on the LME which have resulted in artificially high prices for a series of commodities which had been hoarded by the Too Big To Fail bank. Today, the WSJ continues this investigation into a practice that is not insular to JPM but also includes Goldman Sachs and "other owners of large metals warehouses" which can simplistically be characterized as a De Beers-like attempt to artificially keep prices high for commodities such as aluminum, courtesy of warehousing massive excess supply, artificially low market distribution of the final product, while collecting exorbitant rents in the process. Specifically, "Goldman, through its Metro International Trade Services unit, owns the
biggest warehouse complex in the LME system, a series of 19 buildings in
Detroit that house about a quarter of the aluminum stored in LME
facilities. Coca-Cola and other consumers say that Metro in particular is allowing
the minimum amount of aluminum allowed by the LME—1,500 metric tons a
day—to leave its facilities, and that Metro could remove much more,
erasing supply bottlenecks and lowering premiums for physical delivery
in the process. Coca-Cola, which has complained to the LME, says it can take months to
get the metal the company needs, even though warehouses are allowing
aluminum to come in much more quickly. Warehouses, meantime, collect
rent and other fees." It is not only Goldman's Metro operations, but includes JP Morgan's Henry Bath division, and naturally commodities behemoth Glencore, all of which are taking advantage of the LME's guidelines and rules which make the imposition of a pseudo-monopoly an easy task. The primary driver of this anti-competitive behavior is the fact that GS, JPM and Glencore now control virtually the entire inventory bottlenecking pathways: "In recent years, major investment banks like Goldman and J.P. Morgan and
commodities houses like Glencore have been snapping up warehouses
around the world, turning the industry from a disperse grouping of
independent operators into another arm of Wall Street. The LME has
licensed about 600 warehouses around the world. The transformation has raised questions about whether the investment
banks, which also have big commodity-trading arms, are able to use their
position as owners of warehouses to manipulate prices to their
advantage."And since the outcome of this anti-competitive delayed tolling collusion ends up having quite an inflationary impact on end prices, the respective administrations are more than happy to turn a blind eye to this market dominant behavior which buffers the impact of deflation on input costs. We may have seen the end of the OPEC cartel. Alas, it has been replaced with a far more vicious one - this one having Goldman Sachs and JP Morgan as its two key members.

Keeping a track of all the fluid, hourly changing developments in Greece can be unbearably complex, and as a result one may be left with the impression that things are better than they really are. They aren't. As the SocGen report below summarizes, Greece may have about 72 hours before it gives itself a Pass/Fail grade on Sunday, which in turn will have massive repercussions on the Troica bailout, on the eurozone, on the EUR, and on all those "Lehman-like" consequences you have been reading about. Once again, just like 2000 years ago, the fate of the western world (we would say democracy but that has not been the case for centuries), is about to be decided by a few popularly elected parliamentarians in Athens.

We won't bore readers with the Fed's balance sheet: yes, it is at a new record, and will be at a new record until the week of July 7. Which sure makes for click inducing headlines week after week. It will make for even more headlines after the announcement of QE3 when the same meme will be abused for another 1.5 years, at which point everyone will be so habituated to the idea of "record" anything, not to mention a record low dollar, that the Fed's mission will be complete. There are two things that do need noting however: FX swap lines were not used in the past week, although they will see about a trillion worth of use when Greece defaults, and discount window borrowings jumped to the third highest in 2011, or by 25% W/W (to $91 million, and by 62.5% in the Primary credit facility), another number which will shortly surge. Yet the most notable number, or as the case may be, chart, is as usual the Adjusted Monetary Base, which continues to track the asset side of the Fed's balance sheet well into the stratosphere, and is up by 20% YTD. There is about another $80 billion left on this number before it tops out. What is disturbing however, is that despite the ongoing rise in the AMB, coupled with an actual decline of $100 billion in excess reserves in the past week to $1.57 trillion, the market continues to trickle lower. What happens when the incremental additions to the AMB and to reserves end in precisely 24 days?

In a very surprising move, the AP reports that the UK finance minister George Osborne has announced a major overhaul of British banks, the key provision of which will be the separation of bank retail and investment business "in order to help avoid another financial crisis" - an act which is in essence a reintroduction of Glass-Steagall. What is stunning about this development is that the banking cartel has allowed the UK to get so far as to effectively repeal Gramm-Leach-Bliley, the act that ended Glass Steagall and allowed unprecedented deregulation to convert formerly safe banks into the mastodon, 50x levered, TBTF hedge funds they are now. And if this is happening in the UK, how long before Europe adopts the same overhaul in order to placate its austerity-ired population, and deflect populist anger where it belongs: the banking oligarchy which continues to defy nature, and the simple laws of bankruptcy, and demands that there is never even the smallest impairment of senior claims. All this may very soon be changing.

Well, all that bitching at the Comex over PM manipulation has paid off. The Chicago exchange just lowered its initial and maintenance margins by 10% from $6,751 to $6,075 and $5,001 to $4,500 respectively. In addition to GC, the CME lowered MGC, CGT, QO and 8Q contracts. Yet while it also dropped a bunch of irrelevant petroproduct margins, the CME is now targeting the Corn and Hogs speculators, apparently doing China's job for it, by hiking margins by 50% for the same crop year in C and lean hogs LN all months by 66%. Other products that saw a margin hike were Wheat, Soybean, Lumber, Dry Whey and Live Cattle. But back to gold: is this the catalyst for the next big move up? We should know within a few days...

The one and only data point that has given the bears pause is the extremely bearish sentiment readings. As an example the AAII survey recorded its highest bullish view on December 21, 2010 at 63.3% bullish to 16.4% bearish whereas on June 15, 2011 those readings were 29.0% bullish to 42.8% bearish. Bulls have argued this contrarian indicator says to buy stocks while bears have scratched their heads questioning why sentiment is so bearish with the VIX below 20 and equities only 7% off their multi year highs. Makes no real sense or does it?